Equities market update


Can the KSE-100 index go beyond 2,600 points?


Nov 11 - 17, 2002

Some economic analysts and people in general do not consider the leap-frog movement of KSE-100 index sustainable. Whereas, equities analysts predict that the index may touch 2,600 level shortly and still continue its upward movement. They also say that the movement this time is not similar to that of nineties. Most of the analysts, believing in strong fundamentals enjoyed by Pakistan, consider the index movement sustainable, they also express certain apprehensions due to prevailing political uncertainties. They link continuity of economic and foreign policies and process of privatization with the stance taken by the new incumbents.

The concerns are that the politicians have not been able to reach any consensus regarding the future prime minister, which has also led to postponement of inaugural session of the newly elected national assembly. The fears is, if the politicians and elected representatives are unable to resolve the prevailing situation how will they address more sensitive issues like foreign policy and economic agenda, the two grossly interrelated and interdependent issues.

The positive point is, despite an unclear/uncertain political scenario, the KSE-100 index has shown sustained upward movement in the post October 10, era. Do the investors give less importance to prevailing political scenario? Or, they believe that economic agenda will prevail over the composition of future government. The overwhelming feeling is that politicians are talking about non-core issues, whereas the focal point should have been continuity of economic reforms or coming up with more pragmatic reforms. The reforms which can address, eroding purchasing power, unemployment, poverty alleviation, and, above all, Pakistan's image as investor friendly country.

Is this appropriate time for investment in equities. May be not, if one looks at the history of the KSE-100 index. Since late 1991 the KSE-100 index has ranged between 766 to 2,661 points. Most of the time it has moved between 1,100 to 1,900 points. Therefore, one tend to believe that investing at this high level may not be prudent. Investors get a feeling that the index over 1,900 levels is pricey. Therefore, this become a strong psychological barrier.

However, if one makes a deeper probe, the findings are contrary. The fundamentals like earnings growth, price-to-earnings ratio, price-to-book value, return on equity and dividend yield are very attractive even at this point. Therefore, evaluating the worth of Pakistan's stock market, simply by looking at KSE-100 index is incorrect. According to report from InvestCap, the current KSE-100 index level is overstated by around 400 points. The analysis shows that an index without adjusting for cash dividends should have been at around 1,300-1,400 points and not 1,770 points as the KSE-100 index was at June end 2002.

However, another report from AKD Securities, suggests that it is important to understand the factors which have driven the market to 8-year highs. According to the report, the market driver has been the substantial easing of monetary policy since 1st July, 2001 and the enhanced ability of the central bank to sustain the easing. The monetary ease was enabled by a host of fundamental changes in the external account. In future, the market driving force will be provided by improvement of macro situation and corporate profitability.

In terms of macro situation, Pakistan has seen a paradigm shift. Market strategists and fund managers have, from as back as 1996, consistently sought to identify which macro factors led to and have kept portfolio investment out of the KSE. The list is almost endless and is subject to change with the very fluid circumstances that have been part and parcel of investing in Pakistani equities.

As regards the similarity or dis-similarity of current index movement with the strides of nineties a fact must be kept in mind. The dominant investment themes in the 1990s were liberalization, deregulation, globalization and privatization, where Pakistan faltered in the later part of the decade. The dominant theme, going forward, will be domestic demand providing impetus to profitability growth.

Those investors, who feel that they have missed the boat, should not have regrets. The KSE has historically given investors several entry/exit points during a cycle. Therefore, if they wish to still make some gains, they should focus on dividend yield. Growth prospects are bright for companies due to greater fiscal space generated through lower interest rate profile and growing emphasis on consumer finance. The spread between dividend yield and the 5-year Pakistan Investment Bond has narrowed significantly.

Saying this, there is a word of caution for small investors. First they should not follow herd mentality and before making any investment decision must also do their home work. They must go through the research reports prepared by various brokerage house. They should also develop a diversified investment portfolio to minimize their risk.